Restructuring nuclear medicine firm MDS posts first-quarter loss

TORONTO — Nuclear medicine company MDS Inc. has completed its restructuring into a smaller medical isotope business, but an ongoing shutdown at a key nuclear reactor continues to strain its primary source of revenue.

TORONTO — Nuclear medicine company MDS Inc. has completed its restructuring into a smaller medical isotope business, but an ongoing shutdown at a key nuclear reactor continues to strain its primary source of revenue.

Ottawa-based MDS (TSX:MDS) announced in September that it would sell off most of its business units to focus on its Nordion nuclear medicine division, which sells radioactive isotopes used in medical imaging and sterilization.

Steve West, who stepped in as chief executive in January, said Tuesday that the company got rid of the last of its non-core assets in early March, with the sale of its early stage pharma services division. The company cut 225 jobs in Montreal and 50 more in Pennsylvania as a result of the sale.

“We are now focused on preparing Nordion to become a well-positioned, stand-alone business,” West said.

“(But) the company will continue to see the impact of strategic repositioning on its financial results for the next few quarters,” West warned.

MDS, which reports results in U.S. dollars, recorded a first-quarter loss from continuing operations of US$43 million or 36 cents per share, including a $33-million pretax charge, versus year-earlier earnings of $3 million or three cents per share.

Revenues dropped to $46 million from $66 million in the year-ago period as the company continued to feel the effects of an ongoing shutdown of Atomic Energy of Canada Ltd.’s reactor in Chalk River, Ont.

The National Research Universal reactor, currently MDS’s only supplier of medical isotopes, has been off-line since last May due to a heavy water leak.

The company said operating income at the MDS Nordion business in the first quarter was $3 million compared with $15 million in the same quarter last year.

The facility could reopen in late March, meaning MDS could be processing isotopes again in the second quarter.

MDS shareholders recently approved a motion to change the company’s name to Nordion Inc., to reflect its new focus and MDS is working to implement the change in the coming months.

The company will focus this year on completing the transition and implementing a plan to reduce costs, including winding down its Toronto office to consolidate operations at its Ottawa headquarters.

MDS announced in January it was cutting 150 jobs in Toronto as it moved its headquarters to Ottawa.

The company said it will book about $21 million of restructuring charges in fiscal 2010, including $7 million in severance pay for former CEO Stephen DeFalco, as well as the severance and benefits of other employees.

MDS has filed a $1.6-billion lawsuit against AECL and the federal government, alleging negligence and breach of contract over the failed MAPLE reactor project.

The company said hearings will begin in the fall and a decision is expected in 2011.

West said the company continues to search for alternative sources for a long-term supply of isotopes.

MDS recently completed an assessment of the potential to recover additional supply from the Karpov Institute of Physical Chemistry in Moscow, but determined it would not be commercially viable.

The company is also working on a feasibility study on developing photoefficient sources of molybdenum 99 for medical isotopes.

West said Nordion results were positively impacted by strength in radiotherapuetic division, where the company is seeing global growth opportunities.

The company reported a cash balance of $871 million after the divestiture of its non-core businesses. However, it also recorded a loss from discontinued operations of $100 million, compared with only $1 million in the same 2008 quarter.

The company also recorded a $12-million asset impairment charge and $5-million insurance charge related to outstanding litigation associated with the review of the company’s Montreal bioanalytical operations by the U.S. Food and Drug Administration.

The operation was sold in February, but MDS retained certain obligations, including the FDA litigation.

The lab was temporarily shut down in 2006 after the FDA brought up concerns about “contamination” found in 32 out of 5,000 samples found in July 2003 during an FDA inspection.

During the recent quarter, MDS also announced it will spend up to US$450 million to buy back between 40 and 46 per cent of its outstanding common shares in a long-awaited move to boost the company’s share price.

Owners of the company’s stock have long pressed for strategies to boost the share price, once well over $20.

MDS stock has dropped to about a third of where it was two years ago as the company faced challenges such as the recession, the U.S. regulatory investigation into the Montreal lab, weak financial results and troubles with the Nordion unit caused by the isotope supply problems.

MDS stock was off one cent $8.53 at mid-afternoon Tuesday on the Toronto Stock Exchange with more than one million shares traded.